This article has been written by Shreya Patil, pursuing a Diploma in International Business Law from LawSikho.

Introduction

After a huge Hullabaloo in the wake of banning the Chinese mobile app – Pubg mobile, in India, which practically contributed as a stress buster during the initial stages of pandemic lockdowns amongst youngsters, is finally back in India. This Hi-tech Game didn’t only fight battles virtually but has faced challenges even in real life and on an international level. The reason being it was not only banned in India but in 8 other Asian countries including China! You must have thought at the beginning that Pubg wasn’t a Korean-owned gaming company?  It’s definitely Korean! The facts suggest that PUBG Mobile is the mobile version of “playerunknown’s battleground” (PUBG) i.e., a South Korean gaming company named Pubg Incorporation. The Mobile version that got banned was developed by a company named Tencent, a Chinese conglomerate. However, to not lose the International fame and users it attracted in a small span of time Pubg Incorporation parted its ways with the TenCent. 

However, this wasn’t the only storm that Pubg Incorporation dealt with Chinese-based companies. The lesser-known dispute lawsuit concerning the copyright infringement, unfair competition, and trade dress infringement of the by NetEase inc., a Chinese IT Company’s Games namely “Rules of Survival” and “Knives out” for duplicating their game Genre i.e., Battle Royale. For Non-Pubg Players, Battle Royale basically means that the combats are engaged in battles where the last surviving participant is ultimately the winner. Despite the grievous allegations by PUBG Incorporation, NetEase Inc. claimed the lawsuit as a “Shameless Attempt at monopolizing the Battle Royale genre”. Although the big news doesn’t circle about the Lawsuit but jurisdiction of the filing the Lawsuit. To many surprises, this Lawsuit was filed in the Federal Court of California, USA. That Brings the question, was the Federal Court of California, the USA competent to resolve the matter between two Pubg Incorporation Vs. NetEase Inc., where the no party was an American or California-originated Company. That’s where International Business law plays a pivotal role. Before we proceed to understand the checklist of the Federal court of California for exercising its jurisdiction on this case, let’s try to recognize the underlying issues. 

Underlying issues

Chinese tech NetEase faced a lawsuit from PUBG Corp. over Trade dress infringement and unfair business competition under the United States Copyright Act. These serious allegations were made by Pubg Incorp. argued on the grounds of overall look, feel, and audio-visual style of both the Games (of NetEase, Inc., i.e., “Rules of survival and knives out” closely mimic the stylized realism of “Battlegrounds” which the Pubg believed to be their original creation. Since Pubg Corp. raising this dispute invoking the copyright act of the United States, it’s important to understand that the Idea behind a video game cannot be copyrighted. This definitely benefits the small independent video game developers as well as big giant tech companies but also sort of restricts their creativity. Although the original idea of the game may not be copyrightable but few elements of the video game definitely be the protection which are: 

• The characters in the game 
• The gameplay of the game 
• The sounds (including dialogues) 
• The artwork and visual design of the game 
• Game codes 
• Player license. 

Since the lawsuit of copyright on the grounds of “Idea behind the video game” i.e Battlefield genre was near to impossible by Pubg Corp, allegations were made for the Trade dress infringement and Unfair Business Competition in the California Federal Court which was made in violation of California Business and Professions Code (Section 17200, et seq.,), California common law and copyright infringement (under 17 U.S.C Section 101, et seq.,) and the court hereby recognized to exercise the jurisdiction based on having subject matter jurisdiction on this dispute as well as having personal jurisdiction on the defendant NetEase. Inc, which have a very remarkable difference.  

Difference between subject matter jurisdiction and personal jurisdiction in US Federal courts

Validity of Jurisdiction in order to execute valid, enforceable judgment on a claim is a must for avoiding any challenges to prove the validity of the judgments. Jurisdiction is categorized into:

1. Personal jurisdiction- where the federal court may have power over the defendant providing minimum contacts with the court. Personal jurisdiction is a matter of constitutional law in the U.S. This practically means while the jurisdiction is being exercised over a defendant there are few standards to be followed. 

• Minimum contacts of the defendant to the forum.  
• Relatedness of the plaintiff and the defendant.
• Fairness of the forum to exercise the jurisdiction. 

2. Subject matter jurisdiction- This is where the court has the power to hear the specific kind of a claim. To put in simple words, The authority of the court, to hear specific cases relating to the subject matter of their country. It should be noted that though the Litigating parties may waive personal jurisdiction, it is impossible to waive subject matter jurisdiction and a motion to dismiss for lack of subject matter jurisdiction is a favored defense. 

Jurisdictional grounds of California Federal Court to motion this dispute

• Authorized permission to execute business in the State of Delaware. 

Although, the Plaintiff Pubg Corp. Is a South Korean company having principal place of business Seoul, the incorporation (“PUBG AMERICA”) is a corporation existing under the laws of the State of Delaware being a “wholly-owned subsidiary” of the Plaintiff PUBG.  The Defendant in this dispute i.e., The NetEase is a Beijing, China-based company. However, it was also registered to conduct its business in the state of Delaware under the name titled “NetEase.com (U.S) Inc.,” where the company also had a registered agent for service of process at The Corporation of Delaware. None less the “NetEase.com (U.S) Inc., was actively involved in Capital Markets of the United States where the shares of the NetEase had been listed under the NASDAQ Global Select Market since the year 2000 under the name titled “NTES” where they regularly filed reports under Securities and Exchange commission pruning them actively in the United States Capital Markets. NetEase also maintained an investor relationship in New York, United States. 

• Incorporation of NetEase information technology:

The Federal court in this particular dispute also noted that the subsidiary of NetEase Inc., i.e., NetEase’s Information Technology was incorporated under the name NetEase North America i.e, NetEase Games and since the subsidiary of information technology of the company was incorporated in California whose principal place of business was also the same. This subsidiary of NetEase Inc. was responsible for all the information technology handling, i.e responsible for the claims made by the company of Pubg Incorp.  Hence the Federal court of California claimed subject matter jurisdiction over claims of copyright infringement under the Copyright Act.

• Subject matter jurisdiction under the Lehman Trademark Act:

As Cliché as it may sound, with more multijurisdictional activities, the more frequent extraterritoriality becomes. Concerning the Supreme court of United States, it held that Lahman Act confers jurisdiction over the extraterritorial disputes involving trademark infringement and unfair competition when the: 

1. The defendant is a United States Incorporation.  
2. The Foreign activity had substantial effects in the United States. 
3. Exercising jurisdiction would not interfere with the sovereignty of another nation.  

These interpretations and judgment were ruled out in the case of Steele v. Bulova Watch Co the “extraterritorial arm” was proved to be extremely useful for companies trying to protect trademarks from any trademark infringements outside the state. Simply put, there shall be a likelihood of the Lahman Act if the involvement of the United States was implicated. The Pubg corp. claimed that the defendant had infringed their “Trade Dress” which might raise questions if the trademark infringement and trade dress infringement are different. As far as this case is concerned, trade dress seeks protection for the non-copyrightable elements that identify popular games from clones and then try to sustain the value of their investment in gaming apps while also minimizing the issue of consumer protection. As far as United States laws are concerned, Trade dress finds an explicit place for statutory protection under Section 43(a) of the Lanham Act and hence the federal court accepted the subject matter jurisdiction with respect to the Trade-dress infringement. 

• Unfair Competition law of California:

Since both the business entities i.e Pubg Corp and NetEase Inc., were registered to do business in the State of Delaware, the Federal court of California had the subject matter jurisdiction over the dispute under the State of Unfair Competition law of California. The California Unfair Competition Law provides relief for unfair competition and wrongful business practice that economically harms either consumers or business entities. Not only is unfair competition a business tort designed to stop any unfair practices that might be happening in the context of a business setting but they are designed to protect the economic, intellectual, and creative investments made by businesses in distinguishing themselves and their products. The California Unfair Competition Law is codified in the business and professions code. 

• Personal jurisdiction of California Federal Court over defendant “NetEase” 

Since the company NetEase regularly conducted business in California including the subsidiary NetEase distributed mobile games through the Apple App Store and Android Google Play distribution network which are solely American-based companies. They not only committed acts in the judicial district of California but were also not subjects of any jurisdiction in any state’s court of general jurisdiction and hence the Federal court of California had the personal jurisdiction over defendant NetEase sole reason being excessive contacts with the United States including the act which gave rise to this action. 

Foreign subsidiary law in the USA 

“Foreign corporation” is a term used in the United States of America to represent the corporate entity or an LLC which conducts business in a state or jurisdiction other than what it was originally incorporated in. To dig into this matter while rolling up the sleeves to find out whether a Foreign subsidiary and Foreign Incorporations are different, the answer is No! A foreign subsidiary is a part of a Foreign Incorporation having headquarters in another country. Opening a foreign subsidiary can be a gateway to keep feet in another jurisdiction in order to boost revenues, generate tax benefits and diversify the Company. Despite the independent operation of foreign subsidiaries from its parent company who are responsible for their own assets and liabilities are deemed to be a separate legal entity for taxation and regulatory oversight by the subsidiary from the establishment of the company. To simply put, the sovereign laws of the Parent company won’t be applicable but the laws of the jurisdiction where the subsidiary is incorporated shall be exercised. 

Difference between a regular subsidiary and a wholly-owned subsidiary

Since we now know that “Pubg America” was a wholly-owned subsidiary of Pubg Corp., whereas NetEase IT was a regular subsidiary, it is also crucial to understand the difference between the both which empowered it to blend in the foreign market of the U.S. A wholly-owned subsidiary is the one where the parent company holds 100% of the majority stock controlling interest in its subsidiary. However, a regular subsidiary has over 50% (half, plus one more share) of its voting stock which is controlled by the Parent company. Both types have their pros and cons. Without a doubt, it can be stated that a regular company has the advantage to enter a foreign market without any legal barrier to enter into the Foreign Market. A regular subsidiary having independent legal directors who have an absolute chance of acting in the interests of a regular subsidiary when conflicts arise in contrast with the wholly-owned subsidiaries. While a wholly-owned subsidiary does have its own pros, the restriction to enter into a foreign market still remains with additional legal liabilities on the Parent Company. Although the “Pubg America” was a wholly-owned subsidiary of its parent company, it could not sue “NetEase Inc”, the sole reason being, independent legal liability of “NetEase IT” who looked after the information technology of the parent company and also was actively involved in the domestic market of U.S.  

Conclusion

Opening an international office often means welcoming complex questions about your company’s tolerance for legal risk, how the enterprises might be taxed, and what compliance challenges it might face. Given the comparative complexity of a subsidiary versus a wholly-owned subsidiary, why do so many companies choose it as the operating entity for their international offices? The key reason is the subsidiary’s separateness or distinct legal entity, the subsidiary gives a parent company an additional layer of protection from liability. Although both the companies might have come to the terms of settlement outside the court, it is crucial to understand how international business law functions in different jurisdictions and how the status of different entities matters to exercise legal liabilities. 

References

1. https://cdn.ymaws.com/www.csusa.org/resource/resmgr/mw19/cle/esports_art/8_-_pubg_corporation_v._nete.pdf
2. https://www.uscourts.gov/about-federal-courts/federal-courts-public
3. https://www.mondaq.com/india/copyright/879888/copyright-in-the-gaming-industry#:~:text=Although%2C%20contents%20that%20form%20part,artistic%20and%20musical%20form%20can.
4. https://www.law.cornell.edu/wex/standing 
5. https://www.jimersonfirm.com/blog/2018/07/lanham-act-extraterritorial-trademark-protection/

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